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Company assets and divorce: Prest v Petrodel and the corporate veil

Increasingly people are looking to take steps to safeguard assets from relationship breakdown, much as they do from tax and on death. In June, the Supreme Court gave a key judgment in Prest v PetrodelResources which provides helpful guidance on the wide ranging powers of the family courts to distribute assets on divorce.

Assets are often held in companies, both for business purposes and for succession planning. On divorce, a person’s shareholding in a company will be valued, and that shareholding could be transferred to the other spouse in satisfaction of their claim. This is, however, rarely a particularly attractive remedy for anyone concerned.

It is often preferable to “buy out” the other spouse’s claim, by transferring or selling assets. However, there may be a difficulty if those assets are actually owned by the company. This was the issue in Prest v Petrodel.

This case reaffirmed the traditional position that a company is a separate entity from its shareholders and therefore the shareholders have no legal rights in any company assets. However, the Supreme Court held that although that legal principle was correct, based on the facts of the case they could look behind the appearance of corporate ownership and treat the company assets as if they belonged to the husband.

The legal reason here is that the companies were held to be a trustee of the assets for Mr Prest, even though there was no express paperwork to this effect. That relationship was established by the way in which the company acquired the assets and how they were subsequently treated.

When will the courts conclude there is a trust of this sort? Every case depends on its facts, but one key question will be “who paid for the asset”? If, for instance, the trading company is named as the buyer, but all of the money for the purchase comes directly from personal funds with no evidence that that is a loan or gift, then that will indicate strongly that the company is a trustee and the asset is available for the family court judge to attack.

The notion that transferring an asset into a company puts it beyond the reach of the courts on divorce is now questionable, quite apart from whether it is a sensible commercial or fiscal move (which it often will not be). Advice should certainly be taken before taking any such action.